In January we reported the following: https://caldaro.wordpress.com/2012/01/30/feds-monetary-base-update/. The FED’s monetary base did make a new high, in February at $2.753 tln, but appears to have ended well short of our $3.0 tln expectation. Since then the monetary base has contracted by nearly $100 bln. The recent high, in OEW terms, may have completed Primary wave III. This would suggest the base in now contracting in a Primary wave IV.
During the FED’s monetary expansion policy, each labeled peak has generally coincided with a stock market peak and followed by a correction. We anticipate the market will continue to follow this relationship. While QE 1 and QE 2 greatly expanded the monetary base, Operation Twist has done very little in that regard. Currently we do not see a need for a QE 3. The economy appears to be expanding again with the WLEI at 51.0%, and the PCE remains above the 3% threshold.
Europe, however, initiated LTRO 2 in December 2011. This program ended in late February, and the ECB’s balance sheet now exceeds that of the FED. Should europe’s sovereign debt problem head into crisis mode again a LTRO 3 is likely. For now it looks like the stock markets are on their own for a while as the Secular deflationary cycle continues.
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